Yemen’s Central Bank Becomes Latest Front Line in Civil War

The Yemen central bank branch in Aden is an unremarkable government building, some of its sand-coloured walls and tall windows pockmarked with bullet holes from street battles fought nearby during the city’s liberation from northern rebel forces.

But last week, after president Abdrabu Mansur Hadi announced that the building in Al Aidarous neighbourhood will soon become the country’s central bank headquarters, it has quickly become conspicuous, as it now represents the centre of a new economic dimension to the war.

The streets around it are now blocked off and patrolled by security personnel, while people who want to enter the bank for business must pass through several layers of security. On a recent afternoon two soldiers sat on an orange water cooler in the back of a pickup truck with a .50 calibre machine gun mounted on it.

Officials in the internationally-recognised Hadi administration have said the government had no choice but to unilaterally relocate the bank from the capital Sanaa to territory they control. They say the bank is on the verge of insolvency, largely because it was being drained by the rebel alliance of Houthis and military forces loyal to former president Ali Abdullah Saleh to fund their war efforts against pro-government forces and the Saudi-led coalition.

They claim that less than US$700 million (Dh2.57 billion) is left in Yemen’s foreign exchange reserves, far lower than the estimate of $1.3bn in reserves the bank held in June, and down from $5.2bn in September 2014. The halting of oil exports and the inability of the state to collect taxes during the conflict contributed to the financial crisis. But the government claims that the rebels were the main cause.

“It has become obvious that the Yemeni Central Bank in Sanaa financed the putschists at government expense and therefore has totally lost its neutrality and independence,” Monasser Saleh Al Quaiti, the newly appointed governor of the bank, said last Monday in Riyadh, where he is currently based.

Bank officials in Sanaa have denied any collusion with the rebels. Its veteran governor, Mohammed bin Humam, was allowed by both sides of the conflict to steer bank policy because he was viewed as a skilled and independent technocrat — a view still widely held by officials in the Gulf and among western diplomats in the region.

But in late July, the Hadi government made a request to the IMF managing director Christine Lagarde to cut off the central bank from funds soon after the rebels formed the Supreme Political Council (SPC) and declared it the country’s sole government. The move, which brought an end to peace talks in Kuwait, was called unconstitutional by Mr Hadi and was condemned as illegitimate by the UN.

Nonetheless, the SPC has pushed forward in a bid to create the perception that it is able to rule areas under its control — where the majority of the population do live — and has even found some traction with Russia. A delegation will reportedly visit Moscow for talks. The SPC has vowed to keep the central bank in Sanaa.

The decision to move the bank is aimed at applying overwhelming economic pressure on the Houthi-Saleh alliance controlling the capital city by eliminating their ability to pay public-sector salaries, especially the $100 million per month for soldiers on the government payroll, many of whom are fighting with units loyal to Mr Saleh.

“The unilateral decision by President Hadi to dismantle the Yemen Central Bank and move its headquarters to Aden is the equivalent of economic siege to the north,” said Karen Young, a political economist at the Arab Gulf States Institute in Washington.

But successfully moving the central bank apparatus from Sanaa to Aden will be fraught with major challenges that the Hadi government has so far not explained how it will handle. During the announcement of the new bank governor’s appointment, no details were given and none of the key policy or logistical questions have been answered.

One of the most pressing questions in the short term is how those running the bank will decide who on the government’s payroll will still be paid, and how they will receive their salaries.

The war has severely disrupted Yemen’s economy, and there is a fuel shortage crisis that has caused a 60 per cent spike in food costs, according to a Yemen Food Security Information Development Programme report from June. The steady depletion of foreign reserves has weakened the value of the local currency and as up to 90 per cent of food staples are imported, this has resulted in a significant rise in imported inflation.

In Aden, money exchangers were less anxious about where the bank will finally be located than whether it can alleviate the cash crunch.

“We do not care about the relocation, we need the central bank to provide banks and money exchangers with enough foreign currency and Yemeni Rials,” said Motaz Wahid, an exchanger in Khour Maksarm.

More than half of all Yemenis now suffer from malnutrition, and 21 million people — out of 28 million — are in need of humanitarian aid. The country is on the cusp of widespread famine.

Yemen’s state-run social welfare fund that was helping 2.5 million of the most vulnerable people has been suspended, and despite a 30 per cent reduction in the government salaries, they are now the only source of direct income for a quarter of the population. Displaced people have moved in with friends and relatives who have relatively more means, usually through access to government salaries.

The prime minister, Ahmed bin Dagher, said last week that the central bank under his government’s control would continue to pay the salaries of civil servants across the country, including areas under rebel control.

There are around 450,000 military personnel claimed to be on the government rolls. A significant portion of the names are assumed to be “ghost soldiers” added by military commanders now on both sides of the conflict ahead of the 2014 budget, which is still in effect.

Even if the new bank governor is able to sort out which soldiers are fighting for Mr Saleh and cut off their salaries, it is unclear how the government will handle the fallout.

“If tomorrow 200,000 are not paid, that translates to around 1.5 million individuals because each one is supporting a family of seven and that’s their only source of income usually, so the impact can be much bigger than people could imagine,” said Rafat Alakhali, a former cabinet minister and now a fellow at Oxford’s Blavatnik School of Government.

“That’s where the difficult questions come to play — it makes sense that the government does not want to fund the units fighting against it, but what happens to the soldiers, do they have alternatives? Will there be a process for them to join units that are loyal to the government?”

The government likely hopes that the increased economic pain will push people to turn against the Houthi-Saleh alliance in Sanaa and elsewhere and create pressure for them to concede during negotiations. But observers caution that the dynamic could also push people who were not fighting to side with the rebels.

The bank under Mr Bin Hummam and his staff of nearly 2,000 had, despite the meagre resources, managed to use the reserves to service foreign debts up until May, import food and fuel, and issued credit to the finance ministry in order for state salaries to be paid. They also tried to craft a monetary policy that was aimed at limiting spiralling inflation as the availability of foreign currency dwindled.

Already, government salaries have not been paid since August, and Yemeni embassies overseas have been funded by the Qatari government for the past several months, and it is unclear whether the bank will still be able to maintain its policies and keep issuing credit. If the Sanaa bank is cut off from foreign reserves and the new bank is not set up quickly, the economy could be pushed even closer to collapse.

“It will be difficult to manage the currency, even over the very short term of a couple of weeks during the transition, which could result in a serious inflation crisis and a lack of liquidity in local banks,” Ms Young said.

Staffing the bank will also be a major challenge. Under Mr Bin Hummam, many of the staff were sent for education and training abroad, and the bank was the best-run public institution in Yemen. “It’s not easy to imagine that they can replicate that,” Mr Alakhali said.

Aden has been the target of repeated terrorist attacks against state employees, and the government has not been able to move there from Riyadh. Attracting hundreds of qualified experts and technocrats may prove to be a major challenge.

“The problem of staffing a new institution in a war-torn and unstable Aden will be especially difficult,” Ms Young said. “It is not clear if only the central bank governor is to be replaced or all of the senior staff. In any case, it is certainly a human resource challenge.”

There are also logistical hurdles. The payroll records and other key documents such as records on the billions of dollars in treasury debt issued to commercial banks and many Yemenis are all at the Sanaa bank, with a very low proportion digitised, Mr Alkhali said. Houthi officials have vowed to keep the bank in Sanaa, and it is unlikely that they would allow all the documents to be moved to Aden. Government salaries are usually paid in cash — how will the majority of civil servants who live under rebel control receive their salaries?

Regardless of where the bank is located, it is on the verge of bankruptcy. Public debt reached almost $26bn in 2015, or more than 94 per cent of Yemen’s GDP. The Hadi government and its western allies will look to Riyadh and other Gulf countries in the coalition who have backed the move to ensure its viability. In the short term, this will mean an immediate injection of cash.

Saudi officials have not released any details on what their role will be with supporting the new bank.

But Gulf countries have so far not provided direct financial support to the government’s budget. Instead, aid has been delivered through independent humanitarian organisations or, from the UAE into Aden in the form of infrastructure and redevelopment projects, according to a report from the Sanaa Center for Strategic Studies.

“We have not seen much going through the government, so I’m not sure we can expect vast amounts of money to go to them now,” Mr Alkhali said. “I think they did not trust the government’s” ability to properly use the aid, “whether due to corruption or just general lack of capacity, not having a bureaucracy and institutions.”

Ahead of the announcement, western diplomats had opposed the move because it could create a parallel set of national institutions in Aden that could pave the way for southern secession, a Gulf-based source familiar with the diplomatic discussions said.

However, the Yemeni foreign minister, Abdel-Malek Al Mekhlafi, told Reuters on Saturday that international institutions such as the IMF support the bank move, and it appears that the US and UK now tacitly back the plan. But no public statements have been made, and since the start of the war, the IMF publicly supported the efforts of Mr Bin Humman in Sanaa.

“It may also increase the likelihood of a divided Yemen, should a peace be achieved,” Ms Young said.